Subject: File No. 4-573
From: Art Micheletti
Affiliation: Economist/Investmetn Strategist

October 15, 2008

Mark to market accounting is one of the primary causes of the recent global financial crisis. Forcing assets sold under duress into illiquid markets is not fair value accounting it is distressed value accounting and financial suicide. Valuations should be based on the present value of cash flows. I cash flows decline the value of the asset should decline until then you are making up numbers.The IASB has adopted new standards that should act as a starting point for consideration. I would go one step further and require companies to mark to market if markets are deep, liquid and public, if not companies should be required to mark to cash flow.These models and assumptions should be audited to prevent manipulation.
IASB (International Accounting Standard Board) amends IAS 39 similar to our FASB 157.The IAS 39, is the accounting standard for financial instruments. Until now, IAS 39 did not permit financial instruments which had been measured at market value (such as trading assets) to be reclassified to a different accounting basis. Today's decision permits such reclassification's except for derivatives. The amendments to IAS 39 may be applied retrospectively to 1 July 2008, meaning that companies will not have to report some of the market value changes in Q3 08. Therefore they can defer recognition of these losses occurring in Q3 and subsequently. However, as the initial transfer must be made at fair value, it will not result in immediate write-ups reversing previous write-downs.
The action calls for "sufficient flexibility in the implementation of accounting rules given current exceptional market circumstances financial and non-financial institutions should be allowed as necessary to value their assets consistently with risk of default assumptions rather than immediate market value which in illiquid markets may no longer be appropriate.
Some accountants view the change as inappropriate in that it reduces consistency and comparability across financial statements. That enforcement of accounting rules is weak across Europe and opens the system up to abuse. It establishes precedence for political meddling in accounting standards. It gives an unfair advantage to European banks over US banks.
I would suggest that marking to distressed value is crazy and marking to a more appropriate measure of fair-value such as cash flow should be mandatory allowing comparability. If they have an enforcement problem, stiffen enforcement. If the US has been disadvantaged they should change their mark to market rule. There is no reason that European banks should commit financial suicide along with the US.